Are Banks truly supporting manufacturer’s growth plans?

09 July 2018

Over the past few years, there has been a lot of criticism about banks not providing sufficient support for expanding businesses. Massive losses during the financial crash and higher capital spending, as well as their own in house problems has made banks much more reluctant to invest.

25% of small firms that apply to banks have loan applications rejected. This immediately causes problems for small businesses keen to acquire new equipment, recruit staff or invest in marketing and sales to develop business opportunities. Such rejections invariably lead to a loss of confidence on the part of the management, leaving them concerned about the future if they cannot finance essential expenses for growth.

Convincing banks to lend money has definitely become much, much harder. Every application requires a tremendous amount of documentation and decisions take a long time to be reached. This can be extremely frustrating for businesses needing investment to take advantage of rapidly changing trading circumstances. An order from a major supplier could provide long term advantages – but might equally involve additional expenses in order to complete it. A lack of money could mean that a business then unable to take up the opportunity, thus curbing long term growth prospects.

It is no surprise that many manufacturers are turning to alternative forms of investment. Research undertaken by the London based Nesta innovation foundation highlighted the way in which the alternative finance sector has grown substantially. It states that the alternative finance sector is ‘more sophisticated than ever, building out an infrastructure including risk, compliance and legal teams to support this growth.’ Alternative funding is even being used to fund company takeovers, management buyouts and management buy-ins.

Banks are no longer regarded as the main source of investment. Very few SME companies automatically regard the bank as their primary source of funding – and that is not just because they may have been rejected by banks in the past. SME companies are finding that tailored and flexible arrangements available from alternative methods of funding are quite simply, more suitable to their needs. By 2020, it has been predicted that the UK alternative finance sector could be worth £12.3 billion.

SME’s are undoubtedly benefiting substantially from alternative forms of financing particularly peer-to-business (P2B) or Peer-to-peer (P2P) lending and crowdfunding. The benefits of these alternative funding methods go beyond just provision of finance. P2P lending can be very quick to arrange – in some circumstances, companies can gain access to the funds on the same day that an application is made. This provides considerable flexibility in dealing with changing trading conditions. Crowdfunding is another popular method which can raise substantial sums quite quickly in return for equity shares or rewards in the form of special products, services and events. In doing so, it can act as a marketing and public relations tool widening awareness of a company and its products. Crowdfunding campaigns can result in considerable brand awareness and press coverage. The growth of crowdfunding as an investment vehicle can be seen from the fact that equity based crowdfunding has grown by 295% from £84 million to £332m since 2015.

In addition, other investors are stepping into the breach left by the major high street banks. In 2016, South African bank Investec chose Leeds as the site for a new investment banking facility simply because it recognized a gap in the market for a full service investment bank targeting mid market entrepreneurs. Likewise LendInvest entered the Scottish market to provide bridging and development finance. Within four months of entry into the market, it had announced several major deals including a £200,000 bridging loan on a Glasgow property being refurbished into an HMO.

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